Seven Stock Picks for Students

by: The Wall Street Transcript

On July 2, The Wall Street Transcript interviewed Peter Ricchiuti, Assistant Dean at Tulane University's A. B. Freeman School of Business. Key excerpts, including his stock picks for students, follow:

TWST: Do you advise your students to look for companies whose business they can understand?

Mr. Ricchiuti: Very much so. We received a lot of credit for not being caught up in the tech bubble. Part of that was that there aren't a whole lot of tech companies in this area, but the other part was that one of our requirements is that they be profitable and that we can understand what they do. I once told a class that if we can't explain what a company does with a crayon and a piece of paper, we really shouldn't be writing about them. For instance, we follow a company called Reddy Ice (FRZ). That's a company that is the largest manufacturer of ice cubes in the world. They are out of Dallas and have about 85,000 of those boxes that you see in front of convenience stores. It's a very profitable business with good margins. Ice cubes are the highest-margin item in the supermarket. It doesn't sound very sexy, but it's a terrific investment. Everybody has made fun of us on this one - even my own Dean stopped me in the hallway about a month ago and said, "How's that company in Dallas doing? I hope they don't lose the recipe." So I've taken a lot of ribbing on this one, but it's a great company. Other times, you find companies that just don't fit anywhere.

About 12 years ago, one of the very first companies we followed was a company called Pool Corporation (NASDAQ:POOL). They are just north of New Orleans across the lake. They are in a rather peculiar business - they are wholesalers of swimming pool equipment. So if you are building a pool or run a pool maintenance company, you would buy all your equipment from Pool Corporation. Pool buys its products from the actual manufacturers. It's a business that was very fragmented, and they decided to become the big consolidator. Since we began writing on them, the stock has gone from $1.25 to $40 a share. I tell my students that if you are at a party and you tell people what you are investing in and everybody is excited, watch out. Tell them about Burkenroad companies and you find yourself alone. People aren't even interested in these stories, but they make solid investments.

The Hancock Horizon Burkenroad Mutual Fund [HYBUX] is managed by Hancock Bank in Gulfport, Mississippi. They use the students' research to manage the Fund. It has a little over $30 million in it and has been open for about five and a half years. The students don't manage the money - the bank is the manager. We are not registered investment advisers, but they use the students' research, and most of the stocks in the Fund are the companies we follow with the students at Burkenroad Reports. In the first five years, it was up 106% and outperformed 97% of the nation's mutual funds.

TWST: Do you look for niche markets within sectors?

Mr. Ricchiuti: Yes, very much so. Take EnergySouth (ENSI), on the surface, it is a very small gas utility company in Mobile, Alabama. They supply gas to residential and commercial customers, but it's regulated, and you're never going to get very rich in that business. One of their subsidiaries is a company called Bay Gas Storage, which operates just north of Mobile. It is an area where there is a natural bed of salt - it's the easternmost part of the salt dome that runs from East Texas to West Alabama. They drill those out, and they now have three natural gas storage caverns in there. That's an unregulated part of their business with tremendous demand in a very profitable end of the business. You have a company that's very well managed and has a very steady predictable cash flow from the regulated side. That money is being used to build more natural gas storage caverns on the unregulated side, and we think the potential there is terrific.

TWST: Tell us about the oil services sector and the companies that you have found that are good plays on the recovery.

Mr. Ricchiuti: There are a couple of companies that we have followed for a long time. Superior Energy Services (NYSE:SPN) is a company that does a lot of different things in the oil fields. They are headquartered south of New Orleans and business is just terrific. In fact, the only thing holding back the oil services companies is a significant shortage of labor, but Superior has been able to move around that. They are very big in rental tools, and the rental tool business is a very non-labor-intensive part of the oil field. You just need a couple of people in a yard to get that product out to the customers. The other business they are in has benefited a lot from post-Katrina - they are very big in P&A, or plug and abandonment. When a well stops producing in the Gulf of Mexico, the government requires that you remove all of the production facility. This company is a real leader in that business. There are thousands and thousands of these wells that need to be P&A'd in the Gulf of Mexico, so we are very positive about Superior.

TWST: Do you have any other examples of companies outside the oil service industry that show the different types of companies that you are looking at?

Mr. Ricchiuti: I'll give you three that I think are really interesting. We follow a couple of REITs, and one of the most attractive is EastGroup Properties (NYSE:EGP) out of Jackson, Mississippi. It's a REIT of industrial properties -terminals and warehouses all through the Sun Belt. We like that end of the business a lot. It's not only growing with the economy. If you own an office and a tenant moves, you've got to reconfigure it, repaint it, put in all new carpeting and it's going to be unrented for a while. But, unlike offices or apartments, when a tenant leaves a structure like this, you just sweep it out and bring in a new tenant. So we think that business is very attractive.

Another company we like is Craftmade International (OTC:CRFT). This is a company that designs and distributes lamps and ceiling fans. Their lamps are sold at Bed, Bath & Beyond and Lowe's, but their ceiling fans are real high-end and are sold at designer showrooms. It's very cheap on two measures that we look at. One is enterprise value to EBITDA, and Craftmade is very cheap there. It sells at about 7.5 times EV to EBITDA. The PEG ratio is about 0.75, which is also very cheap. Anything under 1 is considered to be quite inexpensive. We are looking for those kinds of companies that are maybe misunderstood and have very little coverage on them.

Another company we follow is called Team, Incorporated (NASDAQ:TISI). This is a company that has benefited from a couple of things, including Katrina. They are the number one company at repairing and doing maintenance on chemical plants and refineries, and you can remember how hard those were all hit by recent hurricanes. They had a lot of work to do, and business continues to be very good. The other reason their business is quite good is that there hasn't been a new refinery built in the United States since 1976. The infrastructure is getting very old. The older a plant gets, the more likely it is to break down. Frankly, they are terrifically positioned and very well run.